Fundstrat's Tom Lee (Tom Lee) said an overlooked sector in the stock market is expected to soar in 2024 after falling sharply below the S&P 500 index (SPX) last year. The analyst predicts that small-cap stocks could soar 60% this year due to more compelling valuations compared to the S&P 500.

Small-cap stocks are likely to increase more than large-cap stocks, by 50% or 60%. The Russell 2000 Index is expected to break through 3000 points by the end of the year.

In 2023, the Russell 2000 index lagged far behind the S&P 500 index, with an increase of about 17%, while the large-cap index rose by about 24%. This poor performance continued until 2024. So far this year, the Russell 2000 index has dropped about 7%, while the S&P 500 index has fallen 1%. However, Lee said that compared to the S&P 500 index, the valuation index makes the small-cap Russell 2000 index more attractive.

Based on the net market ratio, small-cap stocks have returned to the level of 1999 compared to the S&P 500 index. At the time, it was an absolute low, and it was also the starting point for the excellent performance of small-cap stocks over the past 12 years.

Lee said small-cap stocks were his best choice in 2024, partly because participation in the continued rise in the stock market is improving, and it is no longer focused only on big tech stocks like in 2023.

Lee said in his 2024 outlook that as the breadth of the stock market improves, small-cap stocks should be sought after. Furthermore, he pointed out that there are three factors that may help boost small-cap stocks in 2024.

First, capital inflows into the stock market are necessary for small-cap stocks to outperform the larger market. If retail capital does not flow into the stock market, then it is likely that capital will not flow into small-cap stocks. This is likely to change in 2024 as investors begin to heat up on the stock market.

Second, small-cap stocks are highly leveraged, and capital costs are often higher, so falling interest rates should benefit much more than small-cap stocks.

Finally, the expansion of economic growth may be a “huge tailwind” for small-cap stocks, as they are highly dependent on economic performance.

edit/new